Commodities Today: Finally Seeing A Buying Opportunity On This Pullback

Includes: CHK, EOG, GLD, HK, MHRCQ
by: Matthew Smith

The U.S. Dollar Index continues to hang in above the 80 level and it appears that traders have pegged it there on purpose. The longer this drags on the harder it will be for that level to hold and provide support and our thinking is that if we have no progress in the next day or two then 80 shall break and more attention will be paid to "King Dollar" weakening against such other currencies as the euro, yen, and Canadian dollar. When that hits the mainstream media it might force the hands of the politicians, but until then everything in the market seems to be indicating a deal gets done soon ... even the Treasury market.

Gold and silver are rallying on all of this uncertainty, with gold actually trading north of $1300/ounce once again. Remember, we would rather readers be involved with the physical metals than miners right now so the SPDR Gold Shares (NYSEARCA:GLD) is how we would recommend the trading of gold. Our preference is silver, but many readers find gold more attractive.

Chart of the Day:

The Japanese Yen is near three month highs versus the U.S. dollar and this is due to what is going on in Washington, D.C. and nothing else. Look for a move back toward 99 should Congress reach a deal before any real damage is done.

(Click to enlarge)

Source: Yahoo Finance

Commodity prices this morning are as follows:

  • Gold: $1324.50/ounce, up by $14.60/ounce
  • Silver: $22.265/ounce, up by $0.513/ounce
  • Oil: $102.50/barrel, down by $1.34/barrel
  • RBOB Gas: $2.59/gallon, down by $0.0176/gallon
  • Natural Gas: $3.602/MMbtu, up by $0.096/MMbtu
  • Copper: $3.2765/pound, down by $0.0245/pound
  • Platinum: $1391.20/ounce, up by $3.40/ounce

Small, Multi-Play E&P Names Still Rising...

Friday we were pretty surprised by the price action in Magnum Hunter Resources (MHR) and Halcon Resources (NYSE:HK) as the two stocks rose 7% and 8% respectively. Volume for the two names was well above normal and in Magnum Hunter's case the move capped off a strong week where the stock led its peers higher.

We would look to see a breakdown at the $5/share level and then the shares retreat back towards $4.60-4.70/share. The pullback is what we would buy.

(Click to enlarge)

Source: Yahoo Finance

As it relates to value, Halcon was one of the few names out there that we really liked because its stock has been under pressure lately due to a secondary and worries over the company's spending. If this pop is anything like recent moves that the stock has had, expect to see the shares retreat back to the $4.60/share area and look to buy there. This is a name which is notorious for burning those who chase it on the way up.

Buying Bakken Names On A Pullback ...

The Bakken is the one play in the United States that every investor involved in the oil trade has to have exposure to. It is prolific and has such high oil volumes that any company involved here in a significant manner gets to be classified as an oily/liquids play. As investors have learned over the years, one does not want to be involved in dry production, but rather wet production and oil if at all possible.

Now EOG Resources (NYSE:EOG) has been a big winner for readers in recent months with the stock perpetually rising. There have not been many opportunities to add to positions via pullbacks but with the lack of a compromise in the U.S. House this weekend we think that the next week might provide an entry point for those looking to either set up an initial position or add to an existing position. Remember, these E&P names have rallied through the recent market volatility so the 5% we have seen many of the market leaders retreat by has not happened yet in the oil names.

Icahn's Energy Play ...

One name we are not buying on a pullback right now is Chesapeake Energy (NYSE:CHK), which has had a major shake-up in management since activist shareholders such as Carl Icahn got involved. We have long been bullish on the name due to their exposure to such plays as the Bakken, Eagle Ford and Utica shales, but recognize that the company still has some growing pains moving forward and could see more bumps in the road as they try to develop their large acreage positions in many plays. The transition from a natural gas company to a liquids company is well underway, but one has to recognize that even with the increase in liquids exploration and production the company has done a pretty good job of replacing natural gas production due to the areas they are drilling (which have high natural gas content). This is not to say we dislike the name, we are still bullish long-term but simply feel that any pullback now with the rest of the industry would see less of a snap back than other names with better prospects. The results we continue to see out of the Eagle Ford and Utica point to future growth and as the infrastructure is tied in we should see volumes grow substantially in the Utica.

The stock has been building a base the past few months but we only see a pullback taking the shares no lower than $25/share where the stock has some pretty strong support. There are better opportunities elsewhere in our opinion.

(Click to enlarge)

Source: Yahoo Finance

Disclosure: I am long HK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.